Zuckerberg Bankruptcy Law Office

BusinessWeek calls option ARMs "nightmare mortgages", and, for many Hoosiers, the nightmare has already begun.

I'm an Indianapolis bankruptcy attorney, but, since the U.S. government began offering cash incentives to mortgage servicing companies to modify home mortgages, I've put my professional team to work helping homeowners through the mortgage modification process.

Option ARM mortgages present a gigantic problem.  As CNNMoney explains, "These exotic mortgages allowed homeowners to come to closing with little cash and choose, monthly, how much to pay…"  93% of option ARM buyers selected the option of paying a minimum amount which not only doesn't pay down loan principal, but which is less than the interest due!

Those disproportionately low monthly payments lead to triple trouble:

When a borrower makes a payment that is less than the accruing interest, there is negative amortization.  That means the unpaid interest is added to the outstanding principal balance of the loan.  The next month's interest-only payment will be calculated using the new, higher principal amount.  Even before the rate adjusts, or "resets", the payments can  go up dramatically from month to month.

Option ARMs have automatic "recast" dates, when the monthly payment is adjusted to get the mortgage back on track so that it will be paid in full over the remaining term.  Since the mortgage principal has been going up, rather than down, the recast can make monthly payments triple or even worse.

80% of option ARM loans were done as "stated income" loans.  That means lenders did not verify that the borrowers' income was sufficient to handle the payments after a recast. With lending standards so much stricter today, option ARM borrowers cannot refinance their mortgages.

As much as I and the Columbus bankruptcy lawyers who work in my office there might want to help clients negotiate with their mortgage servicing companies to avoid foreclosure, when the mortgage is an option ARM, that's easier said than done.  The "triple whammy" of issues means option ARM borrowers will not be good candidates for modification. Under the administration's "Making Home Affordable" program, mortgages that exceed 125% of the value of the home are not eligible for assistance.

When people come to one of the Mark Zuckerberg Indiana bankruptcy law offices, many of them report having actual nightmares because of stress over their finances.  When an option ARM is part of the picture, foreclosure may be inevitable.  Sometimes, because there is no home equity to tap to pay medical bills or other expenses after a layoff, bankruptcy needs to be considered.

The interesting thing is, very often Indiana bankruptcy clients discover, to their surprise, that filing bankruptcy can signal the end to their nightmares.  Having taken action, they report feeling as if they've "woken up to greet a new day", ready to take advantage of the chance bankruptcy provides for a fresh financial start.